Accounting for Income Taxes Related to Assets Acquired in a Purchase Business Combination

Problems often arise in trying to account for the value of assets of an acquired company in a business combination because the carrying value and the fair market value of those assets are often different. Introducing the tax effects in the analysis will further complicate the accounting problem. Three alternative treatments are examined in light of 3 basic concepts: 1. Accounting for asset values should not depend on tax treatment. 2. Tax expense should equal taxes paid over the life of the investment. 3. Obligations assumed are part of the purchase price. The Accounting Principles Board Opinion 16 approach results in operating expenses lower than the other 2 methods, but it violates the first and 3rd concepts. The Financial Accounting Standards Board (FASB) Statement 96 approach, which satisfies concepts one and 3 and sometimes concept 2, is marginally preferable given the current emphasis on the balance sheet by the FASB.